(The following statement was released by the rating agency)
-- We believe that Germany-based retailer Metro AG's
profitability will continue to weaken as indicated by the company's 2012 EBITrevision to EUR2 billion from almost EUR2.4 billion. In our view, Metro's globaldiversification fails to compensate for operating underperformance in some ofits European markets.
-- We are lowering our long-term corporate credit rating on Metro to'BBB-' from 'BBB'. At the same time, we lowered our short-term corporatecredit rating to 'A-3' from 'A-2'. The outlook is stable.
-- The rating downgrade reflects our assessment that Metro's businessrisk profile has deteriorated to "satisfactory" from "strong".
-- The stable outlook reflects our view that the company has sufficientfinancial flexibility to maintain its financial risk profile in line withcredit ratios, which we believe are commensurate with the rating.
Rating ActionOn Oct. 11, 2012, Standard & Poor's Ratings Services revised its long-termcorporate credit rating on German retailer Metro AG to 'BBB-' from 'BBB'. Atthe same time, we lowered our short-term corporate credit rating on thecompany to 'A-3' from 'A-2'. The outlook is stable.
The downgrade reflects a continuing trend of lower-than-expectedprofitability. Metro revised its 2012 EBIT guidance before special items bymore than 15% to around EUR2.0 billion from about EUR2.4 billion, which Metro AGachieved in 2011 and 2010. We believe that cost savings from the company's"Shape2012" efficiency program, which should have unfolded this year, havebeen fully depleted as a result of intense competition and challengingmacroeconomic conditions in some of its European countries. In the first sixmonths of 2012 the company's EBIT before special items was 30% below lastyear's numbers; the fourth quarter however is traditionally the crucialquarter for Metro's profitability (about 60% of annual EBIT).
We have revised our assessment of Metro's business risk profile to"satisfactory" from "strong" based on our view that the MediaMarkt-Saturn(MMS) business will continue to be hurt by price competition from onlineretailers and that MMS' historic profitability levels will not be achievablegoing forward. Furthermore, we believe that lower in-store sales willtransform the Cash & Carry (C&C) business and that it will remain difficultfor Metro to run the C&C business profitably in some major countries. This wasevidenced by Metro's exit from the U.K. and its unsuccessful efforts to turnthe German C&C business around to date. In addition, we believe that theRussian, North European, and Asian businesses, where Metro generates about 60%of its sales, will not compensate for difficult trading conditions in some ofits South and East European markets. Therefore, based on the second profitwarning from the company in the last 10 months, we now believe that thecompany will continue to demonstrate lower profitability in the face of thesestructural trends.
Given Metro's focus on improving its working capital position in 2012 andlowering its capital expenditures for 2013, we believe that the company willbe able to maintain an FFO to debt ratio of about 20% in December 2012 andDecember 2013. Nonetheless, we think that inflexible dividend payments couldjeopardize Metro's goals for improving cash flow and reducing net debt, givenits ownership structure. German operating holding company Franz Haniel & CieGmbH (FHC; BB/Stable/B) owns 34.2% of Metro and is one of its controllingshareholders. Metro's "significant" financial risk profile under our criteriawith sizable debt on a lease-adjusted basis has yet to benefit meaningfullyfrom the group's real estate and noncore assets as potential sources offinancial flexibility.
The short-term credit rating is 'A-3'. We view Metro's liquidity as "adequate"under our criteria. We base our opinion on our estimate that liquidity sourceswill exceed funding needs by more than 1.2x in the next 12 months.
As of June 30, 2012, we estimate liquidity sources in excess of about EUR6.6billion.
-- Surplus cash of EUR1.6 billion, excluding EUR0.15 billion which weregardas tied up in operations;
-- Undrawn revolving credit facilities of about EUR3.1 billion maturing inmore than 12 months, of which EUR1.5 billion mature in 2015 and EUR1 billion in2017; and
-- EUR1.6 billion of reported funds from operations (FFO) that we forecastover the next 12 months.
We estimate Metro's liquidity needs over the next 12 months to be about EUR4.8billion, consisting of:
-- EUR3 billion of short-term debt,
-- EUR1.2 billion of cash relevant capex, and
-- Up to EUR0.6 billion in dividends based on the historic track record.
The stable outlook reflects our view that Metro has enough financialflexibility to maintain its credit ratios in line with our rating guidance,namely adjusted FFO to debt and debt to EBITDA ratios of about 20% and 3.5x,respectively, in December 2012 and December 2013. Our base-case scenarioassumes that the adjusted EBITDA margin will fall by about 50 basis points in2012 before stabilizing and that Metro will reduce its capital expenditures.
We could lower the ratings if Metro appears unable keep credit ratios in linewith our guidance. Such a possibility would arise in the case of asharper-than-anticipated deterioration of operating performances or if thecompany adopts a more shareholder-friendly financial policy.
We could raise the rating if Metro succeeds in turning around the currentlynegative business trends and improves its key financial metrics to above 25%FFO to debt and 3.0x debt to EBITDA. We consider such an outcome unlikely overthe next 12 months.
Related Criteria And ResearchAll articles listed below are available on RatingsDirect on the Global CreditPortal.
-- Methodology And Assumptions: Liquidity Descriptors For GlobalCorporate Issuers, Sept. 28, 2011
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009Ratings ListDowngraded; Outlook ActionTo FromMetro AGCorporate Credit Rating BBB-/Stable/A-3 BBB/Negative/A-2Senior Unsecured BBB- BBBCommercial Paper A-3 A-2DowngradedMetro Euro-Finance B.V.Commercial Paper A-3 A-2Metro Finance B.V.Senior Unsecured BBB- BBB
Metro International Finance B.V.
Senior Unsecured BBB- BBB
(Caryn Trokie, New York Ratings Unit)